INTERNATIONAL TAXATION Case Law Update

Transcription

1 CA Tarunkumar Singhal & Sunil Moti Lala, Advocate A. HIGH COURT 1. The Court confirmed Tribunal s Order holding that the commission payments made to Indian agent of non-resident in India was taxable in India and non-deduction of tax on such payment would lead to disallowance of expenditure u/s. 40(a)( Smt. Fathima Harris [TS-390-HC-2017 (Mad.)] The assessee engaged in the export of garments, made payment of commission on exports to an agent of Hong Kong company situated in India and claimed deduction of the expenditure without deducting TDS contending that as the services were rendered outside India by the non-resident, the same was not taxable in India. The Tribunal upheld the order of the AO. Aggrieved, the assessee appealed before the High Court. The Court observing that the commission payment was actually received in India, confirmed the disallowance u/s. 40(a)( and held that the commission payments received by the Indian agent of non-resident in India were taxable in India. i It rejected assessee s reliance on CBDT Circular No. 786 dated (which provided that no tax was deductible u/s. 195 on export commission and other related charges payable to a non resident for services rendered outside India) by holding that the same was applicable only for foreign agents of Indian exporters while in the present case commission was received in India by an agent of the foreign entity. i The AO disallowed the expenditure u/s. 40(a)( on the ground that the assessee ought to have deducted tax on the commission payment since the payment was made in India. 2. The Court confirmed Tribunal s order deleting penalty u/s. 271(1)(c) in absence of deliberate concealment ii The CIT(A) observing that the assessee s attempt in the case of an international export sales had been effected through the transaction Indian concern and the commission payment was made in India, confirmed the disallowance made by the AO u/s. 40(a)(. ML-15 GAP International Sourcing India Ltd. [TS-677-HC2017(Del.)-TP] 155

2 The assessee, incorporated in India as a wholly owned subsidiary of GAP International Sourcing Inc, USA, operated as a procurement support service company whereby it facilitated sourcing of apparel merchandise from India for its AE. The assessee was remunerated at total operating costs plus a 15% mark-up thereon. The goods were sourced by the AE directly from the third party vendors in India and were not routed through the financial accounts of the assessee. The assessee, a low-risk service provider benchmarked its transactions with AEs by adopting TNMM as the most appropriate method. i The TPO accepted TNMM as the most appropriate method, however, recharacterised the assessee as a significant risk bearing entity having intangibles as opposed to a low risk service provider. Accordingly, it determined ALP of assessee's transactions by determining commission at 5.22% (arithmetic mean of the comparables) on the value of goods procured by the foreign AE directly from third party vendors from India and made TP adjustment. ii The addition made by the AO was confirmed by the DRP. In the quantum proceedings, the Tribunal noting that it was entitled to a cost plus markup on total operating cost of GAP International Sourcing India Ltd. (and not the value of goods sourced by GAP US), rejected the assessee s recharacterisation as a significant risk bearing service provider and accepted the assessee s classification i.e. low risk service provider. However, the Tribunal did not accept assessee s mark-up of 15% and instead relying on the Delhi Tribunal s decision in the case of Li & Fung s [TS-583-ITAT-2011(Del.)-TP] substituted the mark-up of 32% (i.e., the maximum operating margin adopted in Li & Fung decision). The assessee conceded by accepting the mark-up of 32% consequent to the decision of the Tribunal whereby the final adjustment was restricted to 156 only ` 6.92 crore as against addition of ` crore made by the AO. Thereafter, the AO levied penalty under Explanation 7 of Section 271(1)(c), contending that since the assessee had accepted the mark-up of 32% as against 15%, the computation of price charged was not done in good faith and with due diligence. v The CIT(A) confirmed the order of the AO. vi During the appeal arising out of the penalty proceedings, the Tribunal followed the decision of the Co-ordinate Bench in the assessee s own case for the earlier AY wherein similar penalty had been deleted on the ground that penalty could not be imposed merely because the addition was accepted by assessee. The Tribunal held that the assessee had made a choice to accept 2% of the addition (i.e., ` 6.92 crore vis-a-viz adjustment of ` crore made by the TPO) made by AO and exercise of such choice in order to achieve peace of mind in the absence of mala fide intention, could not attract penalty u/s. 271(1)(c) for concealment or filing of inaccurate particulars. It further observed that the TPO accepted TNMM as the most appropriate method and accepted PLI and comparables selected by the assessee. Further, the Tribunal in the quantum proceedings accepted assessee s claim that it was a limited risk bearing support service provider. Accordingly, it held that the TP study carried out by the assessee was in good faith and with due diligence adhering to the requirements of Section 92C. vii Aggrieved, Revenue preferred appeal before the jurisdictional HC. The Court upheld the Tribunal Order deleting concealment penalty levied u/s. 271(1) (c) with respect to TP adjustment confirmed in quantum proceedings holding that penalty cannot be imposed merely because the addition was accepted by the assessee. It observed that ML-16

3 the Court in the earlier year involving the same issue, had dismissed the Revenue s appeal against the Tribunal s order deleting the penalty u/s. 271(1)(c). b. Infosys BPO Ltd.: This company was functionally different due to huge turnover, extraordinary events taking place, existence of brand. i Accordingly, it dismissed the appeal in absence of substantial question of law. c. Wipro Ltd. This company was functionally different due to huge turnover, extraordinary events taking place. 3. The Court upheld the Tribunal s Order excluding comparables which were functionally different from the assessee (ITeS service provider) With respect to working capital adjustment, the Tribunal remanded the matter to the TPO directing him to allow working capital adjustment while determining the profit margins of comparables. New River Software Services Pvt. Ltd. [TS-672-HC2017(Del.)-TP] The assessee was engaged in the business of processing information and data through electronic and information technology enabled infrastructure. The assessee benchmarked its transactions under TNMM and selecting 17 comparables with an average margin of 8.45% as against its own operating margin of 10.33% contended that its transaction were at ALP. Aggrieved, the Revenue appealed before the High Court. Since there was delay in filing appeal, the Court refused to condone the delay since there was no satisfactory explanation offered by the Revenue. i However, on merits, it observed that a. Coral Hub Ltd.: the Co-ordinate Bench in the case of Rampgreen Solutions (P) Ltd. [TS-387-HC-2015(Del.)-TP] had excluded Coral Hub Ltd. observing that a business model where services were rendered by employing one s own employees and using one s own infrastructure would have a different cost structure as compared to a business model where services were outsourced. b. Infosys Ltd.: Exclusion of the comparable was upheld by the Court in case of Pentair Water India (P) Ltd. [TS-566-HC-2015(Bom)TP] and Agnity India Technologies Pvt. Ltd. [TS-189-HC-2013(Del.)-TP]. c. Wipro Ltd.: Wipro BPO was more or less on the same footing as Infosys BPO as far as the size and scale were concerned and thus rightly excluded. i The TPO rejected the comparables of the assessee and adopted 5 new comparables which inter alia included: a. Coral Hub Ltd. b. Infosys BPO Ltd. c. Wipro Ltd. The TPO also rejected the assessee s working capital adjustment since the assessee had not demonstrated that there was difference in the levels of working capital employed vis-a-vis the comparables. ii The DRP upheld the TPO s order. The Tribunal excluded these 3 comparables observing that: a. Coral Hub Ltd.: This company was functionally different since its business model was based on outsourcing of service ML-17 ii Accordingly, it upheld the order of the Tribunal. 157

4 4. The Court held that even in the case of remand proceedings, the AO ought to have passed the draft assessment order u/s. 144C before passing final assessment order JCB India Ltd [TS-706-HC-2017(Del.)-TP] The Petitioner was engaged in the business of manufacture of earth-moving/construction equipments. i The AO had passed final assessment order u/s. 143(3) r.w. Section 144C which the Tribunal had set aside to the file of the AO for fresh adjudication with the direction that both the assessee as well as the revenue were at liberty to file fresh T. P. Study and fresh comparables so as to arrive at the Arm s Length Price in accordance with law. Thereafter, the AO asked the TPO to quantify the TP adjustment in pursuance to the remand made by the Tribunal for fresh adjudication. The AO then incorporating the TPO s order passed the final assessment order without passing the draft assessment order. ii Aggrieved, the petitioner filed Writ Petition before the High Court contending that after the remand proceedings, the AO could not have passed the final assessment order without issuing a draft assessment order. Relying on the decision of Co-ordinate Bench in the case of Turner International India Pvt. Ltd. [TS-400-HC-2017(Del)-TP], wherein it was held that it was mandatory for the AO to pass the draft assessment order u/s. 144C prior to issuing final assessment order, the Court held that even where the Tribunal had remanded the matter, the AO ought to have passed the draft assessment order u/s. 144C. i It further held that Section 292B of the Act could not save an order passed in contradiction to the provisions of the Act since it was an incurable illegality. 158 ii Accordingly, it held that the final assessment order passed by the AO was without any jurisdiction on account of the failure by the AO to first pass a draft assessment order before passing the final assessment order. Accordingly, it quashed the order of the AO as well as the order of the TPO passed pursuant to the remand by the Tribunal. 5. The Court quashed Tribunal s Order remanding the AMP issue to the TPO and directed the Tribunal to decide itself whether in the first place there existed international transaction involving the assessee and its AE Haier Appliances (India) P. Ltd. [TS-684-HC2017(Del.)-TP] The assessee, manufacturer of consumer products had entered into an agreement with its AE viz., Haier Electrical Appliances Corp. Ltd., China, whereby the assessee had used and promoted the trademark and brand name owned by Haier China and had incurred advertisement, marketing and promotional (AMP) expenditure. i The TPO noting that AMP/sales ratio of the assessee was 16.04% as compared to 3.87% of the comparables, held that the advertisement expenses over and above the normal AMP expenses incurred by the comparables was towards brand building and accordingly, he made TP adjustment. ii The DRP confirmed the action of TPO. Relying on the decision of Delhi High Court in the case of Sony Ericsson Mobile Communications vs. CIT (2015) 374 ITR 118 (Del.), the Tribunal remanded the matter to the AO/TPO with the direction to examine all the functions carried out by comparables as per the guidelines laid down by the High Court. Aggrieved, the assessee appealed before the High Court contending that at the time ML-18

5 the Tribunal passed the order, it did not have the benefit of order subsequently passed by Delhi High Court in the case of Sony Ericsson Mobile Communications vs. CIT (order dated 28th January 2016 in ITA 638 of 2015) and Daikin Airconditioning India Pvt Ltd. (order dated 27th July 2016 in ITA 269/2016) wherein it was held that prior to commencing TP exercise, the existence of an international transaction involving the assessee and its AE had to be first established and the Court had accordingly remanded the matter to the Tribunal. The Court observed that since the Tribunal had not examined whether there existed international transaction involving the assessee and its AE in the first place the matter was to be restored to the file of the Tribunal in the light of its subsequent decision in Sony Ericsson (supra). B) Tribunal Decisions 6. Taxation of an Indian Working Overseas Overseas taxes and Medicare would not constitute taxable salary in India Held in favour of the assessee Sunil Shinde vs. ACIT [TS-377-ITAT-2017(Bang.)] Assessment Year: of the case The taxpayer was an employee of Fidelity Business Services India Pvt. Ltd. who was transferred to Fidelity Investments Systems Inc, USA from 7th October, 2010 to 21st June, The taxpayer derived income from salary during the Financial Year (FY) i The taxpayer was an ordinary resident (ROR) in India during the said FY. Further, in the United States (U.S.) he was a non-resident during the year 2010 and a resident in ii The taxpayer had offered the actual salary income received in U.S. as taxable in his India ML-19 tax return and claimed Foreign Tax Credit (FTC)2 in respect of the Federal Tax withheld from his overseas salary. The Assessing Officer (AO) in his order added the Federal Tax claimed as FTC to the income of the taxpayer. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the order passed by the Assessing Officer (AO) and enhanced the amount of Federal Tax so added to income. Furthermore, the CIT(A) added Medicare paid in the U.S. and State Tax withheld in the U.S. to be part of the total income of the taxpayer, considering the same as benefit in his hands v Aggrieved by the order passed by the CIT(A), the taxpayer had filed an appeal with the Tribunal. vi The assessee contended as under: A) The taxpayer argued that the Federal Tax and State Tax do not constitute taxable income based on the following judicial precedents for the following reasons: CIT vs. Yawar Rashid [1996] 218 ITR 699 (MP) CIT vs. Y.N.S. Hobbs [1979] 116 ITR 20 (Ker.) CIT vs. Shaw Wallace and Co. Ltd. [1983] 143 ITR 207 (Cal.) CIT vs. Blundell Spence & Co. Ltd [1952] 21 ITR 28 (Bom.) CIT vs. Oriental Co. Ltd. [1982] 137 ITR 777 (Cal.) CIT vs. Ambalal Kilachand [1994] 210 ITR 844 (Bom.) (a) Tax Deducted at Source (TDS) is a diversion of income by overriding title. As the tax deducted would be paid to the Government, only the 159

6 net income received by the taxpayer should be subject to tax in India (b) (c) (d) B) C) 160 Taking a cue from Section 198 of the Act, TDS under the provisions of the Act is only deemed to be income received. However, Section 198 does not refer to TDS outside India Section 5(1)(c) of the Act does not provide for taxation of amounts deemed to accrue/ arise/ be received outside India. Unlike other parts of the said section, deeming fiction does not form basis of taxation in respect of income earned/ received outside India. Given the above, the taxpayer contended that the Federal Tax and State Tax are to be considered as income deemed to be received outside India or deemed to accrue/ arise outside India and are therefore not taxable in his hands in India. In respect of Medicare, the taxpayer claimed that the same is not a taxable perquisite in his hands. The taxpayer has placed reliance on various judicial precedents : CIT vs. Lala Sridhar [1972] 84 ITR 192 (Del), Yoshio Kubo vs. CIT [2013] 36 taxmann.com 1 (Del), CIT vs. L. W. Russel [1964] 53 ITR 91 (SC) where in case the benefit accruing is purely contingent in nature or the employee does not get a vested right at the time of contribution, then the amount so contributed should not be considered as taxable perquisite. India, he should be allowed to claim FTC of such State Tax in India. Decision The Tribunal held as follows: It has been observed that as per Section 5(1)(c) of the Act, the Federal Tax and State Tax withheld in the U.S. would not constitute income that accrues or arises outside India as the same is not actually received by the taxpayer. i Accordingly, the Tribunal has accepted the claim of the taxpayer by relying on CIT vs. Yawar Rashid [1996] 218 ITR 699 (MP) referred by the taxpayer, drawing reference to Section 5(1) (c) of the Act, which enables taxability of actual income that is received by the taxpayer outside India. ii Therefore, Federal Tax and State Tax were not considered taxable in the hands of the taxpayer and the net income after giving effect to deduction of taxes was considered taxable in India. The claim of FTC was remanded to the AO to determine the quantum of FTC as per Article 25 of the DTAA. The FTC claim shall, however, be restricted to the tax payable on the total income before giving effect to FTC. With respect to Medicare paid outside India by the employer, the Tribunal agreed with the taxpayer s contention having regard to the case of CIT vs. Lala Sridhar [1972] 84 ITR 192 (Del.) referred by him. Accordingly, the same was not considered as a taxable perquisite. 7. Delay in deduction of tax from payment for professional charges and corporate management charges Whether disallowed u/s. 40(a)( applying Non Discrimination Article Held : No. Whether Payment for The taxpayer contended that if State Tax Server Maintenance Charges and paid in the U.S. is considered as income in Testing & Development Charges to the ML-20

7 Parent Company in Germany taxable as Fees for Technical Services: Held: No Whether payment for Testing and Development Charges paid to Italian Company taxable as Fees for Technical Services: Held: No In favour of the assessee Cooper Standard Automotive India Pvt. Ltd. vs. ACIT [TS-311-ITAT-2017(CHNY)] Assessment Year: The AO made addition holding that services rendered outside India is taxable, even though there is no Permanent Establishment (PE) in India. By virtue of an amendment to the Explanation of Section 9(2) of the Act, the FTS payable outside India would be deemed to accrue or arise in India and hence TDS is deductible. Similarly, the taxpayer also paid testing and development charges to Hutchinson Italy for the services rendered in the vendor location in Italy. However, no tax was deducted on such payment under Section 195 of the Act. Therefore, the AO made the addition under Section 40(a)( of the Act. Subsequently, the CIT(A) confirmed the addition made by the AO. The auto components of power steering system consisting of three hoses suction line, pressure line, and return line are tested for various parts. The taxpayer manufactures the said parts according to drawing and specifications and designs of the company and subsequently sent to vendor location in Italy for testing on their efficiency and strength. The taxpayer contended that the testing was largely done on machines with very little of human judgment or skill. The only skill required was knowledge to operate the machine and to take readings. The only task of non-resident was to give a report on the performance of component by giving actual values based on readings and design specifications. of the case Payment for professional charges and corporate management charges During the AY , the taxpayer has made payment for professional charges and corporate management charges after deducting TDS under Section 195 of the Act. However, payment for TDS was remitted to the Government of India beyond the due date specified under Section 200(1) of the Act. The Assessing Officer (AO) made the disallowance under 40(a)( of the Act. The Commissioner of Income-tax (Appeals) [CIT(A)] confirmed the disallowance made by the AO. i Payment for server maintenance charges and testing and development charges The taxpayer had made the payment for server maintenance charges for the usage access of the server belonging to the parent company based at Germany. All the activities of the parent company as well as subsidiary companies based around the world are routed through the server. According to the taxpayer, the server maintenance charges are in the nature of reimbursement charges paid to parent company using software related issues, and hence TDS is not applicable. ML21 161

8 Decision: The Tribunal held as under: A) Payment for professional charges and corporate management charges Amendment made by the Finance Act, 2003 in Section 40(a)( of the Act The provisions of Section 40(a)( of the Act as stood prior to amendment by the Finance Act, 2003 prescribe the disallowance for non-deduction or non-payment. The Proviso to the said Section provides that where the tax has been deducted but paid in any subsequent year, the same will be allowed as deduction in the year in which tax has been paid or deducted. The Circular No. 7, dated 5 July 2003 referred by the taxpayer also states the same. Therefore, for allowing the deduction of the expenditure, not only deduction of tax at source but also remittance to the government account is a mandatory requirement. The Proviso to Section 40(a)( of the Act makes it very clear that expenditure is allowed in the year in which the tax has been remitted to the government account. Thus, the taxpayer is entitled to claiming the expenditure in the year in which it was paid. B) 162 that similar payments in the case of residents do not attract the disallowance in the event of non-deduction of tax at source. Thus, taxing the amount under Section 40(a)( for non- deduction of tax at source on similar amounts tantamount to discrimination. Therefore, the tax treaty and the decision relied on by the taxpayer for non-discrimination clause squarely applicable in the taxpayer s case. Accordingly, it has been held that the disallowance under Section 40(a)( of the Act would not be applicable in the case of the taxpayer. C) Server maintenance charges The server maintenance charges are paid for usage of the intranet, the internet, mail data backup, etc., located at Germany. The server is administered by the parent company, and the activities support the periodical data backup, software upgradation, and renewal, interoffice communication like messenger and communicator, etc. On perusal of various decisions: Siemens Ltd. vs. CIT [2013] 142 ITD 1 (Mum), CIT vs. Bharti Cellular Ltd. [2009] 319 ITR 139(Del.), the FTS involve human element and consideration is for rendering the managerial, technical and consultancy services. Therefore, applying the rule of noscitur a sociis the word technical' as appearing in Explanation 2 to Section 9(1)(vi of the Act would also have to be construed as involving a human element. However, the facility provided by the parent company in the case of server maintenance charges was the usage of various activities, and no human interface is involved. The only actual costs are recovered by In the taxpayer s case, though the tax was deducted but remitted to the government account in the subsequent year. Therefore, the AO has rightly applied the disallowance under Section 40(a)( of the Act. Payment for professional charges and corporate management charges Applicability of non- discrimination clause In the case of Millennium Infocom Technologies Ltd. vs. ACIT [2009] 117 ITD 114 (Del), the Delhi Tribunal has held ML-22

9 the parent company from group constituents, and there was no profit element. D) From the facts of the present case, it is observed that the taxpayer is merely using the technology provided by the parent company and no managerial, consultancy and technical services are provided by the parent company. Therefore, it has been held that the payment made is not for FTS and the decisions relied upon by the taxpayer are squarely applicable in the taxpayer s case. Therefore, it has been held that the payment was for reimbursement of expenses and hence no tax is deductible under Section 195 of the Act as held by the Tribunal in the case of Cairn Energy Pvt. Ltd. vs. ACIT [2010] 2 ITR 38 (Chenna. Testing and development charges The activity of testing, operating of the machine and noting of actual reading, whether it suits to the design specifications or not is a specialised activity only a technical person can do but not the machines alone. The machine cannot discharge such functions, and human expert knowledge only can decide whether the parts are acceptable or not. The mere machine operator cannot decide whether the auto parts are as per the specifications and drawings or not. Therefore, the payment is made for technical services. The taxpayer contended that the services are rendered outside India and to tax the income under Section 9(1)(vi of the Act the services should have been rendered in India and utilised in ML-23 India. The Explanation to Section 9(2) of the Act was introduced in 2007 with effect from 1976 and the AY under consideration is , the taxpayer cannot predict the amendment and deduct the TDS which is an impossible task. The payment was made for FTS, and it is taxable under the Act and the tax treaty. However, the services are rendered outside India and utilised in India. As per the decision of Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd vs. DIT [2007] 288 ITR 408 (SC), it is clarified that despite the deeming fiction in Section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilised in India. The Explanation to Section 9(2) of the Act was introduced by the Finance Act, 2007 with effect from 1976 and as on the date of assessment there was no provision to tax the FTS rendered outside India and hence it has been held that no tax is deductible under Section 195 and consequent disallowance is not called for. This view is supported by the Mumbai Tribunal in the case of Channel Guide India Ltd. vs. ACIT [2012] 25 taxmann.com 25 (Mum). Therefore, it has been held that the payment made by the taxpayer for FTS for the services rendered outside India are not taxable under Section 9(1)(vi of the Act and the disallowance was to be deleted